Due to recent cash shortages, growth is projected to slow temporarily this fiscal year

Maintaining the reform momentum is key to stronger growth

India’s overall outlook remains positive, although growth will slow temporarily as a result of disruptions to consumption and business activity from the recent withdrawal of high-denomination banknotes from circulation.

But the nation's expansion will pick up again as economic reforms kick in, said the IMF in its latest assessment. Growth is expected at 6.6 percent in this fiscal year and at 7.2 percent in the following year.

Speaking to IMF News, IMF mission chief for India Paul Cashin discusses these and other challenges, and also highlights the opportunities for this vibrant economy moving forward.

IMF News: The IMF just completed its annual assessment of the Indian economy. How is the economy doing?

The Indian economy is growing strongly and remains a bright spot in the global landscape. The halving of global oil prices that began in late 2014 boosted economic activity in India, further improved the external current account and fiscal positions, and helped lower inflation. In addition, continued fiscal consolidation, by reducing government deficits and debt accumulation, and an anti-inflationary monetary policy stance have helped cement macroeconomic stability.

The government has made significant progress on important economic reforms, which will support strong and sustainable growth going forward. In particular, the upcoming implementation of the goods and services tax, which has been in the making for over a decade, will help raise India’s medium-term growth to above 8 percent, as it will enhance the efficiency of production and movement of goods and services across Indian states.

Challenges remain, however, and there is little scope for complacency. A key concern for us is the health of the banking system, which is still dealing with a large amount of bad loans, and also heightened corporate vulnerabilities in several key sectors of the economy.

And, over the past few months, the economy has been hit by cash shortages, and accordingly we reduced our growth forecasts to 6.6 percent for fiscal year 2016/17 and to 7.2 percent in 2017/18.

IMF News: How is this recent “demonetization” initiative affecting the economy, and what are some of the long-term ramifications?

The initiative affected notes with a total value of about 15 trillion rupees, which amounted to 86 percent of all cash in circulation. Because payment transactions in India are primarily cash-based and electronic payments infrastructure is limited, the shortage of cash has disrupted economic activity, with smaller businesses and rural regions being particularly badly affected.

Fortunately, these effects are expected to gradually dissipate by March 2017 as cash shortages ease. It also appears that measures taken to alleviate payment disruptions, such as temporarily allowing use of old banknotes for purchases of fuel and agricultural inputs, have helped mitigate the negative impact. So we expect the slowdown to be limited and relatively short-lived and the financial system to come through unscathed. Of course, potential loan repayment risks should be monitored carefully, particularly given an already elevated level of non-performing loans.

The demonetization initiative presents an opportunity to increase the size of the formal economy and broaden financial intermediation in the longer term. It can also support a widening of the tax base, help reduce the fiscal deficit, enhance bank liquidity, and give a fillip to the government’s efforts to promote greater financial inclusion.

IMF News: How can India ensure that the fruits of its growth are shared by all?

India has made appreciable progress on several fronts. It achieved its Millennium Development Goals of halving poverty, infant and child mortality, and maternal mortality rates. Students are now staying in school longer, as evidenced by an increase in secondary school completion rates. Moreover, significant progress has been made in enhancing financial inclusion, leveraging technology to bring more of the population into the financial system.

However, progress on improving health, nutrition, and sanitation has been less encouraging, income inequality has risen, and employment growth has been sluggish. For instance, a very large share of Indian workers—more than 90 percent—remain employed in low-productivity informal sector jobs. Women’s participation in the labor force is also low at around 25 percent—the lowest among emerging markets. Further labor market reforms, at both the center and state levels, are needed to encourage better quality job creation and raise female labor force participation.

While there has been important progress, we see scope to pursue better targeting and greater efficiency of subsidy and social spending programs through greater use of the trio of Aadhaar unique beneficiary identification, direct benefit transfers, and information technology. Finally, more needs to be done to raise agricultural productivity and enhance market efficiency. This would help increase supply of high-value foods, enhance returns to farmers, and dampen food inflation pressures.

IMF News: As India’s economy becomes increasingly sophisticated, how does the government keep pace with its capacity to craft sound economic policy?

Sound economic policymaking underpinned by strong institutions is critical for sustainable growth. A recent example of a positive change in India is the implementation of flexible inflation targeting and creation of the Monetary Policy Committee, which have strengthened the credibility of monetary policy and helped maintain price stability in an increasingly complex economy.

In addition to providing policy advice, the Fund is committed to working with the Indian authorities to help build capacity for policymaking. The recently inaugurated South Asia Regional Training and Technical Assistance Center(SARTTAC) headquartered in New Delhi—which will serve Bangladesh, Bhutan, India, Maldives, Nepal, and Sri Lanka—is the first IMF-supported center to combine both technical assistance and training.

The center will provide training to government and public sector employees, enhance their skills and improve the quality of their policy inputs, and will also provide technical assistance to governments and public institutions. SARTTAC is expected to become the focal point for planning, coordinating, and implementing the IMF’s capacity development activities in the region on a wide range of areas, including macroeconomic and fiscal management, monetary operations, financial sector regulation and supervision, and macroeconomic statistics.

In 2050 India’s population is projected to be 1.69 billion — China’s will be 1.31 billion.

India has experienced extraordinary population growth: between 2001 and 2011 India added 181 million people to the world, slightly less than the entire population of Brazil. But 76 per cent of India’s population lives on less than US$2 per day (at purchasing power parity rates). India ranks at the bottom of the pyramid in per capita-level consumption indicators not only in energy or electricity but in almost all other relevant per capita-level consumption indicators, despite high rates of growth in the last decade.

Much of India’s population increase has occurred among the poorest socio-economic percentile. Relatively socio-economically advanced Indian states had a fertility rate of less than 2.1 in 2009 — less than the level needed to maintain a stable population following infant mortality standards in developed nations. But in poorer states like Bihar, fertility rates were nearer to 4.0.

Does this growth mean India can rely on the ‘demographic dividend’ to spur development? This phenomenon, which refers to the period in which a large proportion of a country’s population is of working age, is said to have accounted for between one-fourth and two-fifths of East Asia’s ‘economic miracle’ as observed late last century.

But India is not East Asia. Its population density is almost three times the average in East Asia and more than eight times the world average of 45 people per square kilometre. If India has anywhere near 1.69 billion people in 2050, it will have more than 500 people per square kilometre. Besides, in terms of infrastructure development India currently is nowhere near where East Asian nations were before their boom. In terms of soft to hard infrastructure, spanning education, healthcare, roads, electricity, housing, employment growth and more, India is visibly strained.

For example, India has an installed energy capacity of little more than 200 gigawatts; China has more than 1000 gigawatts and aims to generate 600 gigawatts of clean electricity by 2020. To make matters worse, many of the newly installed power stations in India face an acute shortage of coal, and future supply is not guaranteed. China mines close to four billion tonnes of coal per year, which has a negative effect on both local and global air quality. At some stage, it is probably inevitable that India will need much greater capacity than its present rate of mining 600 million tonnes of coal per year, which is also causing local and global pollution levels to rise — parts of India face air quality problems similar to those in China. On oil, India imports close to 80 per cent of its crude oil requirements, while it also runs an unsustainable current account deficit of more than 5 per cent of its GDP, and reserves for new energy sources like shale gas do not look promising either.

India’s food supply is in an even worse position. As a member of India’s Planning Commission put it, ‘we have a problem and it can be starkly put in the following way: around 2004–2005, our per capita food grains production was back to the 1970s level’. In 2005–07, the average Indian consumed only 2,300 calories per day — below the defined poverty line in rural areas of 2,400 calories a day. The trend in recent years is for Indians to eat even less.

So, for India, treating lightly Malthusian predictions about food supply until 2050 or beyond may not be prudent. Worldwide food prices have been on the rise to unforeseen levels, and India too has been suffering from high food inflation.

Finally, even if India manages to feed its burgeoning population, its growth may not be ecologically sustainable. The global demand for water in 2050 is projected to be more than 50 per cent of what it was in 2000, and demand for food will double. On average, a thousand tons of water is required to produce one ton of food grains. It’s not surprising, then, that international disputes about water have increasingly been replicated among states in India, where the Supreme Court is frequently asked to intervene.

So have the policy responses been proportional to the gravity of the demographic, ecological and developmental problems facing India?

The probable answer is that policy makers have failed miserably on all measurable counts. If one compares India to China this becomes clear. While China’s one-child policy has been criticised as against human dignity and rights — and there is no denying that such measures should be avoided as far as possible — the history of human civilization teaches us that extreme situations call for extreme actions. There will be ample time for multiple schools to have their post-mortems on the success and failure of the one-child policy, but it has helped China to control its population by a possible 400 million people.

The US Census Bureau estimated in 2010 that China will hit its peak population of 1.4 billion in around 2026. China’s fertility rate has been lower than the replacement rate for more than two decades now. That means the one-child policy will have taken nearly 40 years to stabilise or reverse China’s population trend. How long will India take to get to that stage?

There is a distinct possibility of irreversible and unsustainable population growth and big question marks remain over how India will provide nearly 1.7 billion people with their basic minimum demands. In this environment to raise an alarm that turns out to be false is better than relying on comfortable slogans like the demographic dividend. The longer India delays acknowledging the severity of these problems and dealing with them head on, the graver the consequences are likely to be.

Its just a general preception to call India having a population bomb like other lower middle income economies ignoring the fact that India's family planning has over delivered compared to most third world countries.

Have a good read.The myth of India’s population explosion
India too will decline and economically slowed in second half of century like happening to Japan & China today, given it's size and other's pace it will still be largest economy left on planet before 2100.

Just because it happened in China and Japan does not mean it will happen in India. China decline in birth rate was largely due to its one child one family law, and Japans due to rapidly rising income levels per capita, neither which is likely to happen in India.

India too will decline and economically slowed in second half of century like happening to Japan & China today, given it's size and other's pace it will still be largest economy left on planet before 2100.

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See according to the "Economic Survey 2016-17", the average working age population(WAP) in India will not decline as per China, South Korea & Japan, but it will be at constant rate unlike the above 3 country. All the 3 mentioned countries had experienced a spike in working age population, now it is declining.

India's actual WAP will be at its peak after 2020 and this number will continue till 2040.

Just because it happened in China and Japan does not mean it will happen in India. China decline in birth rate was largely due to its one child one family law, and Japans due to rapidly rising income levels per capita, neither which is likely to happen in India.

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I suggest you look at India's Birth Rate and TFR over the last 10, 20 years.

The more gradual demographic transition of India will have several benefits on the impulse loading of its elderly later on (which is going to be a huge problem for China given it has nowhere near the per capita wealth of Japan when it hit this phase).

On the economic front we are still fighting the last war. What people don't see is the next economic or industrial revolution.

We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before. We do not yet know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all stakeholders of the global polity, from the public and private sectors to academia and civil society.

There are three reasons why today’s transformations represent not merely a prolongation of the Third Industrial Revolution but rather the arrival of a Fourth and distinct one: velocity, scope, and systems impact. The speed of current breakthroughs has no historical precedent. When compared with previous industrial revolutions, the Fourth is evolving at an exponential rather than a linear pace. Moreover, it is disrupting almost every industry in every country. And the breadth and depth of these changes herald the transformation of entire systems of production, management, and governance.

We stand on the brink of a technological revolution that will fundamentally alter the way we live, work, and relate to one another. In its scale, scope, and complexity, the transformation will be unlike anything humankind has experienced before. We do not yet know just how it will unfold, but one thing is clear: the response to it must be integrated and comprehensive, involving all stakeholders of the global polity, from the public and private sectors to academia and civil society

It shouldn’t be too shocking that two Oxford researchers, Carl Benedikt Frey and Michael A Osborne, estimated that 47% of US jobs are at high risk from the changes underway in digitisation and automation

Just because it happened in China and Japan does not mean it will happen in India. China decline in birth rate was largely due to its one child one family law,

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India's fertility rates are already low, even lower than developed countries. India doesn't even need one child policy to control population like China.
Or I say,
INDIAN SOCIETY ITSELF HAS ADOPTED SOME ONE OR TWO CHILDREN LAW. WE DON'T NEED TO IMPOSE IT.

India's growth was higher than China's 6.8 per cent for the last three months of 2016

NEW DELHI: India's economy defied expectations on Tuesday to retain the title of the world's fastest-growing major economy, despite the disruption caused by Prime Minister Narendra Modi's demonetisation decision.

Gross domestic product (GDP) registered 7 per cent growth in October-December quarter, down from 7.4 per cent in the previous quarter.
India's growth was higher than China's 6.8 per cent for the last three months of 2016.

The federal statistics office retained its growth forecast for the fiscal year ending in March 2017 at 7.1 per cent.

The figures surprised economists, who had expected the economy to take a bigger hit from government's decision last November to demonetise old 500 rupee and 1,000 rupee banknotes, taking out 86 per cent of the currency in circulation virtually overnight.
"Perhaps this data is not capturing the impact of demonetization," said Aneesh Srivastava, chief investment officer, IDBI Federal Life Insurance Co.

"I am totally surprised and stunned to see this number ... I believe that, with a lag, we will see an impact on GDP numbers."

Obviously very early days for an entirely unproven technology that it not anywhere near being ready BUT if it is to be the next revolution in public transport (or at least part of it) then India needs to be involved from day one and in at the "ground floor", not late to the party as it is with HSR. Hyperloop could transform the face of India perhaps moreso than any other single peice of technology.

+Interesting/pleased to see Mr Kant and Prabhu at the presenation, I am all but sure that no minister from UPA would have been present. Can't fault the good intentions of Modi's cabinet (on the whole).

Obviously very early days for an entirely unproven technology that it not anywhere near being ready BUT if it is to be the next revolution in public transport (or at least part of it) then India needs to be involved from day one and in at the "ground floor", not late to the party as it is with HSR. Hyperloop could transform the face of India perhaps moreso than any other single peice of technology.

+Interesting/pleased to see Mr Kant and Prabhu at the presenation, I am all but sure that no minister from UPA would have been present. Can't fault the good intentions of Modi's cabinet (on the whole).

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About couple of months back, it was said that this company concept , one of another portfolio investment of Elton Musk, was looking to raise capital in order to demonstrate it's capability to many nations and governments who might be interested for such a project..

In Delhi they were there with some senior industry big wigs to talk about the program and also about them being participants in the implementation...

The tube concept itself is very radical. As a country it will benefit us a lot but what needs to be seen is the insane amount of input cost..It's just too high atm..

Probably bcz associated infrastructure itself is not up to mark for a country like ours.. we should rather concentrate on the existing upgrade programs... But yes if say a Tata, Mahindra, Ambanis, Parekh, Patel, Reddy, Adani etc etc can come fwd and find some project for say connecting a busy freight corridor, then nothing like it!!!

what will be cost difference between HSR and this tube concept..
like life cycle cost difference .. if it is not too much and safety is exceptional , we better skip HSR and straight away go to the new concept

Obviously very early days for an entirely unproven technology that it not anywhere near being ready BUT if it is to be the next revolution in public transport (or at least part of it) then India needs to be involved from day one and in at the "ground floor", not late to the party as it is with HSR. Hyperloop could transform the face of India perhaps moreso than any other single peice of technology.

+Interesting/pleased to see Mr Kant and Prabhu at the presenation, I am all but sure that no minister from UPA would have been present. Can't fault the good intentions of Modi's cabinet (on the whole).

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Hyperloop is, as you rightly said, a very unproven technology with serious issues to address (some of which can be found in these vids) -

It's good they are considering some cooperation but I hope we don't commit any money for this tech just yet.

Overhaul of existing railway infrastructure and various HSR projects should be priority.

It's good they are considering some cooperation but I hope we don't commit any money for this tech just yet.

Overhaul of existing railway infrastructure and various HSR projects should be priority.

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The sub text of the Railway minister's comments was just this, he/they will be watching the Hyperloop tech and will facilitate them where possible but India won't be commiting to it anytime soon, there are established procedures that won't be bypassed just for a fancy presentation. Basically, once the tech is proven and model validated, the IR will look at it seriously but he/they are not in a position to commit to anything at this stage, the IR aren't venture capitalists.

India will outpace the United States to emerge as the second largest economy in purchasing power parity (PPP) terms by 2040, global management consultant PricewaterhouseCoopers has forecast in a report.

India’s GDP growth is estimated to have slowed to 7.1% in 2016-17 from 7.9% in 2015-16 after the government decision to scrap Rs 15.44 lakh crore worth of high denomination notes or 86% of currencies in circulation. However, analysts expect the economy to bounce back from 2017-18 on rising consumer demand.

By 2040, India’s gross domestic product in PPP terms will grow to $30 trillion from $8.7 trillion in 2016, while US will grow from $18.6 trillion to $28.3 trillion, said the PwC report titled “The World in 2050”.

China will continue to lead the chart with its GDP rising from $21.3 trillion to $47.4 trillion by 2040.

By 2050, China’s GDP in PPP terms will touch $58.5 trillion followed by India ($44.1 trillion) and the US ($34.1 trillion).

However, India’s GDP measured in terms of dollar will grow to $28 trillion to emerge as third biggest by 2050, after China ($49.9 trillion) and the US ($34.1 trillion). In 2016, India’s GDP size was just $2.3 trillion, a fraction of China‘s $11.4 trillion and $18.6 trillion of the US.